Cost of Credit in the Interbank Lending Market

This paper is aimed at explaining, how commercial banks borrow credits form the Central Bank Russia in repo auctions. To achieve the aim of this work the following tasks are performed: First, the main instruments of the monetary policy of the Central Bank of Russia is discussed with the focus on repo auctions as one of the main instruments of the monetary policy. The main features of the repo auctions are discussed. Next, a survey on the relevant literature is given. The last section of the work proposes a theoretical model of commercial banks’ behavior. First, a simple model of the auction is given, where banks can borrow from the Central Bank by bidding the desired cost of credit which is the interest rate that could be set on the level not lower than the level of the key rate. This rate is called floating and is at the level below the fixed. The equilibrium in this case is derived. Then the model is complicated by adding a second day and assuming that the week consists only of two days. On the second day commercial banks can borrow from the Central Bank only on a fixed rate. Again, the equilibrium in this case is derived and the function of the amount of credit borrowed by commercial banks on a fixed rate is derived.